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'Hair Trigger Environment' Pressures Natural Gas Prices

The current factors affecting the gas market have created a "hair trigger environment for gas prices" that will last at least another two months, according to a report released by consultant Stephen Smith. And in an interview with NGI last week, FERC's Steve Harvey, deputy director of market oversight and assessment, said most market indicators currently point to continued high prices through the winter and perhaps much longer.

"Our one-month-ago forecast for August bidweek was $7.25-$7.75/MMBtus and this range still appears reasonable for contract expiration," said Smith in Stephen Smith & Associates' July Monthly Energy Outlook. "Our current forecast for September bidweek is $8.10-$8.60/MMBtu. This assumes $55-$60 [West Texas Intermediate crude oil futures prices] 5-10% warmer than normal temperatures and cumulative August hurricane shut-ins not exceeding 10 Bcf.

"A hurricane with the impact of Ivan could drive prices temporarily over $10/MMBtu," Smith said.

He noted that the gas storage surplus has declined steadily from about 420 Bcf (compared to what he calls "10-year average norms") on June 3 to a projected 271 Bcf for the week ending Aug. 5.

"If adjusted for...post 2003 storage preferences [of having a 200 Bcf surplus in storage due to less excess wellhead capacity], the projected Aug. 5 surplus would be only 21-71 Bcf -- a level which could be eliminated by October with only moderately higher than normal [cooling degree days]." Over the last two months CDDs have been 15% greater than normal.

This sets the stage for a very shaky rest of the hurricane season, which is expected to remain more active than normal, he said.

Harvey, meanwhile, also believes the market is on shaky ground and said there's no mystery why gas prices are high right now. "Two things explain a lot about gas prices [currently]," he said. "One is scarcity. Otherwise a lot of it seems to be explainable by oil prices.

"It's not the storage levels that are really affecting things now," he said. In a presentation made last week at the summer meeting of the National Association of Regulatory Utility Commissioners, Harvey noted that spot prices have broken outside the historical band of association with storage levels at times over the last two years. Despite surplus storage levels, which historically have depressed prices, spot prices have spiked and remained high. Recently the reasons for this have been pretty clear.

"It really is a combination of oil prices not letting gas drop too far and the horrific last two weeks of [hot] weather," Harvey said. "I think markets are nervous about what that is going to mean in terms of how gas is used an how [it affects storage levels]. We are in good shape in storage right now but the question is can we continue to be and burn as much gas as we probably have burned in the last couple of weeks."

Last week's minuscule 42 Bcf injection (with a 1 Bcf withdrawal in the Producing region) was a partial answer to that. But even if a storage surplus is maintained, Harvey said natural gas simply can't drop very far until oil prices cool down. "I'm not sure what's going to do that. We just have never seen gas prices drop real low compared to oil prices in the recent past at all," he said.

"I think [prices this winter will] depend on how the end of the summer goes and whether storage continues to fill. And then it depends on how [cold the winter becomes]." He noted that the last few winters have not been that cold overall.

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